THE EU is bringing in a windfall tax on power companies such as ScottishPower's owners Iberdrola to soften the blow of spiralling energy prices this winter.
The European Commission president has unveiled a plan to cap the revenues of electricity-producing companies that are making extraordinary profits thanks to the war in Ukraine and climate change.
The commission proposal would set a cap for prices charged by companies that produce low-cost, non-gas energy, such as nuclear and renewables groups, Ursula von der Leyen told the European Parliament in Strasbourg that the proposal could raise 140 billion euro (£121 billion) to help people hit by soaring energy prices.
But Liz Truss's new government last week which agreed to an energy price freeze to combat the energy crisis,has insisted it will not be funded by a windfall tax on energy firms.
The EU move would be expected to hit Iberdrola - the Spanish owners of ScottishPower - which is the world's second biggest producer of wind power.
In 2021, renewables accounted for approximately 45% of the net electricity generation of Iberdrola, with wind representing the largest share. Meanwhile, nuclear energy accounted for 14.1 percent of the company's electricity production.
Iberdrola landed a net profit of €2.07bn (£1.8bn) in the first half of this year - up 36% - thanks to what it called "good performance in the United States, Brazil and the United Kingdom".
It has a net profit expectation of between €4bn (£3.46bn) and €4.2bn (£36.34bn) for the year as a whole.
Since ScottishPower was taken over by Iberdrola 14 years ago, the Glasgow-based firm has handed over nearly £7bn in dividends to their foreign owners.
The Liz Truss price freeze eliminates the £3,549 average annual duel fuel price cap set by the market regulator Ofgem due to come in in October.
Instead, the price cap has been frozen at £2,500 for the next two years from 1 October, which the Government believes will deliver a “pro-growth, pro-business and pro-investment approach for the country’s energy security”. That is still over £600 more than the cap set for around 1.5m Scots households in April, and double that which was in place last winter.
It is believed that the support package will total more than £100bn.
It is believed to follow a plan championed by ScottishPower head Keith Anderson who has insisted there need to be a government-backed superfund from which they could borrow to subsidise bills.
He indicated the fund could be paid off by the rest of customers who can afford their bills or the government could partially fund it.
But Ms Truss was adamant that another windfall tax on energy firms would not be introduced, claiming that it would deter investment.
“We can’t tax our way to growth,” Truss said. “It’s all about helping people with their energy costs. A [windfall tax] would discourage the very investment we need to secure a homegrown energy supply.”
But during her State of the European Union address, Ms von der Leyen said: “These companies are making revenues they never accounted for, they never even dreamt of.
“In our social market economy, profits are OK, they are good. But in these times it is wrong to receive extraordinary record revenues and profits benefiting from war and on the back of consumers.
“In these times, profits must be shared and channelled to those who need it the most.
“Our proposal will raise more than 140 billion euro for member states to cushion the blow directly.”
With winter approaching, the 27 EU member countries are struggling to contain an energy crisis that could lead to rolling blackouts, shuttered factories and a deep recession. Russia has already cut gas supplies partially or entirely to 13 member countries.
Europe has also been hit by a drought said by experts to be the worst in 500 years.
The EU plan did not include an earlier idea to cap Russian gas prices. EU countries are divided over whether broader gas price caps would help or harm efforts to secure winter supplies.
A draft of the full Commission proposals would remove excess revenues from wind and solar farms and nuclear plants - by imposing a cap of 180 euros (£155.72) per megawatt hour (MWh) on the revenue they receive for generating electricity.
Experts say that would cap their revenues at less than half of current market prices.
Some energy firms have questioned how much cash the EU plan would raise, since wind farms sell their power under fixed-price contracts, and are therefore not reaping windfall profits from high market power prices.
"The measures proposed to cap revenues for renewable and low-carbon electricity producers risk damaging investor confidence," said Kristian Ruby, secretary general of Europe’s electricity industry body Eurelectric.
Oil, gas, coal and refining firms would be required to contribute 33% of their taxable surplus profit from fiscal year 2022, the draft plan stated.
Ms von der Leyen also said that the 27-nation bloc’s electricity market must be reformed to properly tackle the energy-price hike crisis that is hurting European businesses and households.
She said that a “deep and comprehensive reform of the electricity market” is required to reduce the influence of natural gas on the way that prices are set. Natural gas is used to power industry, heat homes and offices, and generate electricity.
Even before Russia started its war against Ukraine, many EU member states had been calling for a thorough and structural reform of the bloc’s energy market because they believe that the influence of gas in setting wholesale electricity prices is disproportionate.
“The current electricity market design … is not doing justice to consumers any more,” Ms von der Leyen added.
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